Post of the Day
October 5, 1999
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
Long Term Trends and Us
Warning: Long, rambling post that may, or may not, end up making a point!
I've been avoiding this board for a while. It's always tough to own stock in a company when the stock just isn't performing, and it's even more tedious to listen to all the over analysis when you know just why you own it. So, in the interest of being totally hypocritical, I'd like to take a few moments to lay out some observations, which in a way, lead to an analysis of a long term trend in the brokerage business. These observations are based on my own personal experience, and although they are not universal, might shed some light into areas that some of you may not be fully familiar with.
Some disclosures; I'm long EGRP, I've been actively investing for a long time, I don't use E*Trade or any online broker, I do use a cut loss strategy that I purposely didn't apply here (hey, I'll admit I'm stupid in a heart beat, it's usually cheaper !), I'm way past the average account size of a typical online user, and I used to have an account with PaineWebber (I think I caught many of the prevailing ideas currently floating around here).
First the history: I originally used my family's broker, because it was easiest, but after a number of years, felt I needed my very own. I began to shop for a broker. I chucked the car sales man, and the steel rep, I liked the clinical psychologist, but restrained myself, and then found a young man about my age that had majored in finance, traded on the floor of the AMEX for a couple of years, and then worked in the institutional department of Oppenhiemer for a year before taking on accounts (I only put this in because there are good brokers that actually understand the business out there). We've been together a long time now, and he's helped me make a lot of money, but things have changed.
|"95% of assets are still kept at traditional brokerage houses."|
I have always done my own research and have always had a hand in the investment decisions that effect me, but candidly, did not have access to the best resources until the last few years (sure The Value Line and The Wall Street Journal are okay, but the info still lags to a certain degree). As good information became more readily available, I found that the generation of new investments shifted from about 75% from my broker to about 10% from my broker. This presented a problem. He had made me a lot of money, but why pay such a premium for something he had nothing to do with? I decided to move some of my money out.
Online brokers don't provide the flexibility that I have grown accustomed to, so I opened up an account with a neighbor who had recently left Merrill Lynch and started up his own little brokerage house. The cost of a typical $25K transaction dropped from $300 to $80, and for $50K from $600 to $110. I still got personal service, and my costs plummeted. It took all of a quarter to have 25% of my portfolio shifted and another call in to my original broker that our future together was not looking bright. And now for the punch line: You know what? He said he knew it was coming, not just from me, but from all of his clients, and he was breaking off on his own, too. He felt he could still justify a higher fee than an OLB, given the level of service, and his expertise for those who needed it, but with PW taking 65% of the commission, on his own was the only way to reduce the cost to the client.
Okay, you're probably asking why you read all this long winded garbage about now, but persistence always pays off. And now, the answers to all things EGRP. For almost twenty years of investing, nothing of subsistence really changed in the industry. Now, something has changed. The only thing a full service broker can maintain separates them from the OLB's is service. They can no longer claim "We know what you need to know, and you have to pay us to find out." Why invest in OLB's? This is the tip of the ice berg, baby. Just because you feel like the Titanic right now, doesn't change anything.
Why did I hold EGRP after the meteoric ride up, knowing full well it was grossly overvalued at that time? I bought it with a three to five year shelf life. None of the fundamentals have changed, just the stock price.
Why EGRP? OLB's are changing the brokerage industry, and EGRP has consistently set the tone for OLB's.
Why EGRP now? If you buy now, you can purchase your shares of EGRP at almost the same price I did, and save not one, not three, no, not even six, but nine, that's right, nine months of time. An offer like this doesn't come along just everyday.
|"Personally, I'd like to see E*Trade back off the get rich quick theme."|
Part II: Places of concern and areas that need improvement. I'm always reluctant to say much here, because if I (or you) was so smart, I'd be running the company. But it's Monday, so I'll employ the Monday Morning Quarterback exemption.
95% of assets are still kept at traditional brokerage houses. No doubt that won't change until OLB's change the way they operate. It's offensive enough to tell a guy with $1,000 in an account that they'll get to him when they get to him (particularly when that may well be his entire nest egg), but you just can't tell a guy with a seven figure cash account that he can't have his way (well you can, but just once).
Personally, I'd like to see E*Trade back off the get rich quick theme. This may help generate new accounts today, but will be a determent in the long run. Big accounts don't need to get rich quick, they already are. The notion of opening an account at a day trading firm is anathema to me. I gamble for fun. I invest for a living, and if OLB's aspire to take on established accounts, at some point they'll have to view those assets as seriously as the people that own them.
Which leads to the final comment. I recognize that OLB's are building a foundation right now, and having started two businesses myself, I know that during that time, a lot of stuff can fall through the cracks. But if OLB's are to transform the industry, it all comes down to one word - SERVICE, SERVICE, SERVICE. Sooner or later, OLB's have to provide it, because, ultimately it's the only thing any broker has to offer. Theoretically, OLB's will provide it cheaper, just as e-commerce businesses are doing in all industries. And if costs go up a little for OLB's, and down a lot for full service (or half service) brokers, and we all meet in the middle, so be it. The only winners will be the clients. And after all, that's us!
Best to all,